Authors

Publication Date

5-7-2002

Abstract

Value based incentive systems could be improved if they explicitly reward management actions that create or enhance the firm's real options. Such systems often focus exclusively upon cash flows relative to resource investment; yet, share values are often substantially greater than the amount that could be justified by expected cash flows from existing operations. Since 1980, a wealth of evidence has grown that reveals several proven ways to increase share value. Indeed, the majority of share value may, in some firms, derive from the present value of growth opportunities or other real options that enhance value by reducing risk or adding flexibility. So, incentive systems must overcome the inherent conflict of interest between owners and managers by motivating all of the proven paths to increase value for shareholders.